Built in Gains

[Acownt4it]

I have a client that was a C-Corp in 1999, changed to and S-Corp in 2000, now wants to close the s-corp and operate as an LLC (to be taxed as a sole proprietor). All income is from rental properties.

My question is this. When he switched to the S-corp, He had a Built in Gain of $44,000 What do I do with this now?

I think it gets reported on Sch. D and is taxed at the max. corporate tax rate of 35%. Is this correct?

As always, any and ALL help is appreciated.

[veritas]

If he waits 10 tax years

the Big tax goes away.

If he distributed the property from the S Corp he will be hit with maximum federal and state corporate tax. He will then get to pay again at the personal level on the gain less the Big tax.

[BOB W]

How many.......

......... properties are from the C Corp period. If any are post period, they can be moved without BIG. He only has to wait 3-4 years for the rest.

[OldJack]

Everyone knows but to be clear.. Any property being distributed the shareholders on liquidation of a C-corp or S-corp is treated by the corporation as sold at fair market value with gain recorded on the corporation books. The assets can't be just considered to be transferred to an LLC.. they may be sold to the LLC at FMV or distributed to the shareholder at FMV and then contributed to the LLC.

With an S-corp the recognition of gain passed to the 1040 shareholder for tax is the end of the tax situation and the asset is out of the corp.

With an S-corp that was previously a C-corp there is also the built-in gains tax (paid by the S-corp at though it was a C-corp @ 35%) with the gain still passed to the 1040 shareholder for tax again (the double tax effect). This of course is only on assets that were owned by the C-corp prior to S-corp status and as was mention in the previous post the built-in gain is waived if the asset has been held in the S-corp for 10 years or more.

Suggest you read TTB, page 19-10

[OldJack]

......... properties are from the C Corp period. If any are post period, they can be moved without BIG. He only has to wait 3-4 years for the rest.

Bob I am confused! What is 3-4 years?

[BOB W]

The .........

.... original post said that the S was elected in 2000> so in 2010/11 the 10 years are complete.... It is now 2007......................My how time flies~~~~~~~~~~

[Acownt4it]

Thank you

all for your replies.

Of course, after my staff and I did all the research on this transaction, (client is a real PITA) he called this morning and said "Never Mind" I am not going to close the S-Corp, going to keep it running as is.

I could have screamed, but instead I billed him for research time. That made me feel better.

Have a great day.